Posted on Jun 1, 2018
Two weeks ago, I was honored to speak at Glassqube, one of the coolest coworking spaces and startup incubators in Abu Dhabi. The audience consisted of entrepreneurs and working professionals looking to start their own business. My speech was about the top 10 mistakes we did launching an internet startup; The mistakes that almost killed our startup in its infancy. The fireside chat covered topics such as pricing strategy, startup business model, driving traffic & SEO, measuring wrong KPI’s, and selling to customers.
The startup, Storat.com is an online marketplace based in Abu Dhabi, UAE for the past two years. (Storat means shops in Arabic, well its a combo of Arabic and english). We were able to grow the user-base to 60,000 users and over 1,500 paying customers and expanded our back-office operations to two additional countries: India and Egypt. However, we realized that a product\platform company needs many years to find a product\market fit. We are still in the second year and have a long way to go.
USP (unique selling point): Storat.com offers a unique technology compared to other marketplaces in the middle east (at least that is what we think!). A seller or a business can open a store on storat.com, list all their products and services, and upgrade the profile page to a bilingual website at their own domain in less than 5 minutes, Server-less! Their products and services will be listed on their website, Storat.com marketplace, and connected social media profile pages. The solution has key features to generate and manage leads online including cloud-telephony to capture leads by phone, Lead Management System, integrated chatting, SEO friendly landing and advertisement pages with call to actions to drive leads and inquiries, etc. The entire technology is proprietary and built by Storat development team. (E-commerce integration is coming before the end of 2018).
What I realized, as a founder of a startup, is that my main job is to balance the hundreds of conflicting decisions with extremely limited resources. Mostly, the conflict between scaling a business vs making it survive on its own. A main distinction between building a service-oriented business and a platform/product business is scalability. We focused on scaling fast and we rushed decisions ahead of their time. It took time to realize that scaling fast may accelerate revenue, but it puts us on a dangerously very short runway. We were losing resources much faster than we can recover it with revenue. We were making a lot of mistakes because we were not stopping long enough, analyzing, and thinking things over. Ultimately this could have crashed the startup. We survived so far. Below is our tale from the first two years. We hope this could help other startup founders, specially in the Middle East, avoid those mistakes to increase their chances of success.
The biggest mistake I did before launching Storat.com is not knowing or appreciating the most important asset in the world: time. When planning and building a business, you consider resources like people, money, space, customers, and products! But later you discover that the most precious resource is time. You can’t speed it up, or slow it down.
For example, a lot of startup founders will execute decisions based on saving financial resources, money! Meanwhile, wasting too much time. You may not have the luxury of sufficient funding, if so, doing it yourself could be the only option.
To give a simpler example, in the first year, we were building the platform with no income. It was difficult to spend money. To save, we used free software. We spent hundreds of hours deploying products like ERPNext, Zimbra for email, and others to run our operations and save on spending on commercial software. Now, we scrapped most of the free software and run our back office operations on commercial cloud software. For accounting, we adapted a simple commercial accounting software: Quickbooks! (Get it to your head quickly, you are a small business! Regardless of your scaling plan, use quickbooks instead of a full scale ERP to save time and money!). The time wasted can never be recovered. It could have been used in customer acquisition, core product development, or a more strategic aspect of the business.
A more disastrous example is our early investment in SEO and organic user acquisitions. Again, in the early days it was hard to spend money. So instead of hiring an SEO expert to help us develop a search engine friendly product, we decided we will save the money and figure it out later. It was a huge mistake, leading to the loss of thousands of hours and eventually hundred of thousands of dollars.
Lesson learned: When you can, save time instead of money.
Conflict point: However, it is still a delicate balance between time and money to keep a runway! Your job is to find that delicate balance.
Early on, we realized that our vision would take time to build. Therefore, we decided to accelerate the release of an MVP that resembled a classified marketplace. I hacked the first MVP based on an open source classifieds script in less than 12 hours in August 2015. (Yes, our first MVP took 12 hours to build). We ran a marketing campaign based on that, gathered some user feedback, and then hired a development team to build our real MVP back in April 2016. We launched it in September 2016 as a free classified marketplace were anybody can register and post their products and services for free.
A free/freemium business model may work for you if you have a clear plan on how you will make money. But for us, we didn’t have a plan for that and we discovered few hard realities about free/freemium for a marketplace: While it is important to build liquidity and the network effect, it shouldn’t be at the expense of the marketplace quality. When you make your platform free, you open it up for everybody who wants to trash their stuff for free. Which in turn makes the buyer experience horrible, ruining the reputation of your platform.
If you want to build a trusted marketplace that has liquidity while preserving a great buyer experience, you have to:
Lesson Learned: There is no shortcut to a marketplace liquidity. If you do it at the expense of quality, your platform will just be another trash classified site!!.
Conflict point: if you are bootstrapped like our startup, you will not have the resources to invest in quality and liquidity simultaneously. We are living with the reality now that it will take 4x more time than what we anticipated to build liquidity in the target categories.
In the first 2 - 4 years, you need to live with the reality that your Internet business is not an Internet business. You will have to run it like a traditional business until you build the processes and brand to scale.
When we launched Storat.com, we built landing pages to demonstrate our products and services. We also launched a paid marketing campaign on Google and social media. In the first 2 months, we closed zero deals!! We quickly realized that a startup without a brand will not be able to sell online or even generate leads. So we hired a field sales executive to meet customers directly. Within 3 months we were able to close 80 paying businesses on our platform. Great!!! Not really, check mistake number 4 below about pricing strategy.
Lesson Learned: You have to deal with your internet platform like a traditional business in the beginning.
Conflict point: You may not have the resources to hire sales people, especially qualified ones. You either do it yourself or find another idea that your paying customers are savvy and educated enough to buy friction-less from you. In the Middle East, we realized that there is a large gap between small businesses and the internet. We are winning business from large and formidable competitors because we are on the ground and they are not!!
When we launched the platform, we built our pricing strategy as a friction-less online business at scale!!!! The average price for the product was $300 per year.
we came to know three hard realities:
1- We managed to gather a lot of feedback from paying customers (Our product development is driven by this feedback now). While all the customers validated our vision “somehow!”, we had a gap in understanding middle east small and medium businesses capacity and willingness to invest upfront in building and driving a business online.
2- Small and medium businesses in the middle east don’t want to pay for software, period! They will try to avoid it at any cost. Combine this with a free\freemium model and you will reduce your chances further in monetization. When I worked at Microsoft, it was hard to comprehend the astronomical piracy rates in the middle east (well I worked mainly in the enterprise and I rarely interacted with small businesses!!). Speaking to hundreds of small business owners in the last couple of years I came to learn some of the reasons why. Small businesses are small for a reason. They can’t scale their business for one reason or another. While they can run a successful life style business for many years, majority of them have limited capacity in one area or another. They depend a lot on basic instincts to manage their business. They will not invest in anything that doesn’t have a direct and immediate impact on their bottom-line. They will also not invest in something that is hard for them to understand or use.
3- The sales cycle and on-boarding for a $300 deal is the same as $10,000 deal. So we came to know early that signing up businesses in the Middle East on a SAAS model required field sales. The problem we faced is that a $300 deal took the same amount of time to close as a $10,000 deal. While we were able to close around 80 deals in the first three months, we were going to run out of money in less than 6 months!!!! Each deal required a visit by field sales and an extensive amount of on-boarding. Whatever simple the technology, small businesses found it very hard to write content, describe their services and products, do graphics and videos, or even come up with simple marketing slogan.
However, there was one common feedback among those first 80 customers. I am quoting one of the customer exact words that resonated deeply and became a flagship of our next pivot.
“Mustapha, I will pay you 100 times more than what you are asking if you can bring me business and genuine leads online. And you can do it using your platform, it is a win-win situation.”
And that is exactly what we did. We increased our average price from $300 per year to $15,000 per year!! Then in another three months, we increased it again to $30,000 per year!!!!! The number of offline transactions reduced from 30 per months to 3!!! A lot in the VC and startup community will challenge that as it hinders growth and scalability. However, we kept the online (friction-less) acquisition engine running. Offline, we succeeded in on-boarding 60 paying customers at an average subscription of $12000 per year. Online, we acquired 1,460 paying customers as of May 2018. Online customers pay $27 to start advertising on our platform, then they convert to higher subscriptions if they see more value (up to $3200 per year) or they pay per lead as the platform bring them business.
This approach meant that we are not the fairy tale of a smashing success startup that rose from 0 to hundred of thousands online customers in few months. However, we felt this is the right strategy for our current situation as it gave us the following advantages:
1- We can survive on our own for much longer without external funding. While the number of transactions were low, it contributed to the platform as it was not a side business.
2- It gave us the opportunity to engage paying customers in deeper discussions and feedback loops which resulted in a clearer product roadmap and features development that can be scaled across many industries.
3- In the first few months, we faced few issues related to SEO and technology. Those high value subscriptions gave us a breathing room to work on fixing the platform and technology while keeping the company running.
4- Deeper engagement with customers gave us the opportunity to learn. When we started, we didn’t have any SME’s in critical areas like creative design, SEM, SMM, SEO, and ultimately lead generation. Those few contracts were big enough helping us hire resources and spend quality time in building capacity in those areas.
While we are very supportive of lower transaction value to increase volume and build liquidity, we learned that we need to build a dynamic pricing strategy to support our cash-flow requirement for each stage of the business. We are in the process of dropping our prices now, while increasing the value of the platform to both buyers and sellers.
Lesson Learned: If you are bootstrapped with no VC funding, build a Dynamic Pricing Strategy. Focus on high value transactions in the first few months to self-fund your business, then start lowering prices to increase the volume of transactions. Run your business like a traditional business for the first few months (years!!) while continuing to invest in your strategic goal\objective.
Conflict point: High value transactions are heavily service oriented. You will still need to find the balance to spend more of your time in product design, development, and building a scaling strategy.
We considered the technology we are building a breakthrough! as it helps middle east customers build an online presence very quickly while resolving the problem of driving traffic to that online presence and convert it to business\leads.
In the first few months, our pitch to customers was not perfect!!! We talked about how their website will be cutting edge, the website will be server-less and practically running on hundreds of servers around the world, how we used the latest Algolia search to deliver sub-second search speed for their website. That their website will be using the most modern Content Delivery Networks (Akami) to deliver content quickly to their customers. How we used advanced caching technology in various layers of the platform for performance. How it is SEO friendly out of the box with proper URL, tagging structure, etc to surface quickly in google search. All of that meant nothing to middle east small businesses!!! One customer asked me after I finished the pitch: What is a website??????
So we fixed our pitch, speaking a language that is more suitable for our customer to understand our product and how can they benefit from it.
Lesson Learned: Please save your time and money printing brochures or building landing pages until you speak and successfully sell to hundred of customers. Adjust your pitch and reflect it online.
Conflict point: There is no conflict point, you either speak the customer language or you are out of business.
If you are wondering what is SEO, then you are probably reading the wrong article :). SEO is search engine optimization. It is about your website showing in the first page of search engines (in the middle east google is the one that matters!). When we started building the platform in April 2016, the team had 3 developers and 1 graphic designer. By the time we launched the platform around September 2016, the company had 6 developers and 1 marketing specialist fresh out of college (no prior SEO experience). Although we knew that SEO is an area we have to focus on, we thought we can postpone it until we finish the core development as we were not making any money. The hard reality we faced later is that Onsite SEO is an integral part of website development. If you are building a new platform, there are many trade-offs and technical decisions driven by SEO: the age of the domain you are buying , number of domain hosts, URL structure, tagging structure, design of pages for placing content correctly (above the fold, below the fold, etc), dynamically generated regional URL’s, etc. Everything your platform engine is dynamically generating should be SEO checked before commencing in development. We have made hundreds of mistakes, we spent thousands of hours trying to figure out what is wrong. What added salt to the wound is that many customers turned us down because we are not ranking in google first pages.
The common slogan for our company in 2017 was “what is standing between us and becoming a $100 Million company is SEO!!”
Off course ranking is not enough to build a successful business, but it was an important slogan to mobilize the company around fixing a strategic issue for an internet platform.
Today, SEO continues to be strategic channel for us to acquire customers and leads. But we know it is not a compensation for building a known brand.
Lesson Learned: Invest early in hiring an SEO specialist before commencing in building an online marketplace.
Conflict point: Hiring an SEO specialist is one of the most difficult hiring exercises. Alot of people will claim being “SEO experts”. But SEO for a marketplace is one of the most complex projects. For example, India has the highest number of SEO specialists in the world. We prepared a list of high value target SEO directors to headhunt. The list contained 50 names! Meaning, in all India, the number of SEO specialists with prior successful experience in marketplaces was only 50!!! At least the ones that we were able to locate!!! So, prepare for a challenging task ahead.
We built our mobile app, after few failures and sizable investment. So, what is wrong with building a mobile app in a Mobile First world?? Well, there is nothing wrong with it if you found your product\market fit. We did the first trial to build a mobile app only 3 months after launching the platform. The platform was far from mature and we were doing updates and changes everyday. Going web first was the right strategy as we could build features quickly to experiment. However, trying to launch a mobile app very early was a big mistake.
Lesson Learned: postpone building new channels for your products until you find a product\market fit. A Mobile app should be part of a scaling strategy, not a “me too strategy”. Don’t do our mistake.
Conflict point: The mobile app gave our brand more value in-front of potential customers, helping us close few more deals. However, it is not contributing significantly “yet” to our core KPI’s.
Frankly at the beginning we didn’t know which KPI’s to measure. Or we knew the obvious ones. We were measuring business, financial, and technical KPI’s: number of new user registrations, pageviews, bonus rate, sessions, organic traffic, etc. While those are important, but not the most strategic for a bootstrapped startup. Among the KPI’s we didn't measure in the first few months are:
Lesson learned: A key factor of maturing your platform is building data gathering and analytics tools to measure important Key Performance indicators (KPI’s). Those KPI’s will have critical input for decisions making like which category to focus on, pricing strategy, development of product features, etc.
One of the biggest mistakes we did was scaling too fast in number of areas. an example is that we should have stayed in shared workspaces and business centers for many more months, if not years. We invested in moving to permanent offices in three different countries in less than 16 months. That created a burden on us for managing facilities, spending scarce capital on office furniture and equipment. There is a logical explanation for each decision. For example, in India, it was really hard to attract top talent when you are based in a shared space. With a high number of failing startups in Bangalore , we had to give a sense of stability to new prospects. Renting our own offices gave that sense and helped a bit in attracting top talent. However, we could have invested that money in paying higher salaries or flying our employees more to develop further.
Unless you are funded by Rocket Internet with a strategy of copy, scale, dump and virtually unlimited amount of funding, building a platform and finding a product\market fit may take many many years. I am spending quality time now building this into our company DNA. Great things take many years to build. I personally take my deepest aspiration in “struggle” stories like Microsoft hardship in the first five years , Intuit founders being turned down by many VC’s and spending more than 7 years to build serious traction. Now Intuit is a $50 Billion business. Basecamp focus on profit slogan, and MailChimp Un-Silicon Valley Way to Make It as a Start-Up. If you don’t have domain expertise, like us when we started, anticipate 24 months to learn and another 24 months to start fitting your product into the market.
I created a rule before launching the company and i called it the 5-years rule. I said:
“I don’t know much, so I will build a company that can survive for 5 years without any income. Along the way, I will figure it out”
Translating this, build your financial plan anticipating a long time to generate serious revenue. While we generated revenue early, the company couldn’t have survived the many experiments and mistakes without a sufficient runway, luckily self-funded or from close family angel funding. I continue to maintain the 5-years rule. At the beginning of each quarter, I measure the burn rate and the financial resources the company has to check if we are maintaining the 5-years rule. Then I adjust spending decisions based on that.
Take your time in scaling your business. A startup is a war of attrition, it is not a kamikaze attack!! Plan to be in the trenches for a long long long long long time. Focus on building a healthy revenue, profit, and cost control. For example, be careful with the KPI of growing your revenue 20%–30% per month. It may work for some, but it could be a recipe for disaster that will put your startup on a runway to crash without proper cost control.